China: The Auto Industry’s Cheap High

Last month, George Kennedy and I were sitting in a conference room at the Boston Globe headquarters listening to a presentation by a fairly substantial auto manufacturer on upcoming products. About ten minutes into the presentation, the subject turned to China, and how vitally important that nation was to the overall success of the brand.
Minutes went on as we got a lesson in Chinese car buying habits, interests and demographics. We’ve sat through similar presentations from every auto manufacturer now, from low-end to ultra-luxury. China is critical. The problem is that China is the industry’s crack cocaine, a cheap high that already seems to be getting more difficult to experience.
If you watched the Summer Olympics in 2008, you have an idea why. During the marathon, you got a hazy, obscured picture of what Chinese cities look like. Just last week, Paul Eisenstein reported for The Detroit Bureau that China has initiated quotas for new car sales, threatening China’s status as the world’s largest automotive market.
Chinese cities are under an intense cloud of smog that’s slowly but surely killing people. The city of Harbin, for example, with a population of 11 million people, has been forced to shut down much of its manufacturing capacity because pollution levels have reached “crisis conditions,” according to Eisenstein’s report.
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Major highways and the airport in Beijing shut down in an attempt to rein in pollution on days when the air quality index rose past 200, a level described as “very unhealthy,” causing health warnings for the entire population. In comparison, Los Angeles currently has an Air Quality index of 70, or “moderate,” two full classifications below “very unhealthy.”
“What good is having all those sparkling new buildings,” wrote Thomas Friedman in last Wednesday’s New York Times, “if you’re trapped inside them? What good is it if China’s rapid growth has enabled four million people in Beijing to own cars, but the traffic never moves?”
As a result, Beijing announced last week that it has sharply reduced the number of automobiles able to be registered in that city from 240,000 to 150,000 per year.
Despite the pollution issues, China buys about 17 million, mostly gas-burning cars a year – approximately 2 million more than the United States is expected to this year. But that’s with a population of 1.34 billion, more than a billion more people than exist here in the United States.
Chinese citizens are also profoundly poor. In a nation where we’re bombarded by messages about income inequality, the average American has about $12,500 in disposable income per year. On a national basis, China’s per capita disposable income is about $3,150 per year. And that’s an average of China’s urban population. Its vast rural population is destitute, earning only about $919 per year in disposable income.
One bright spot for the industry was supposed to be production of electric cars, since China has a goal to become the world’s largest electric vehicle marketplace. But the same issues that plague electric cars here – performance, price, range and lack of infrastructure – have meant that sales have never met expectations.
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For now, the automotive industry seems content to shift its sales in China from congested, intensely polluted cities to those up-and-coming cities in central and western China that haven’t yet been literally choked by their own success.
But a shift in China’s emergence as the leading automotive purchaser is coming. Where does the industry focus its efforts after that?